Post Holiday Seasonal Effect On Stock Market (Strategy, Examples, And Backtests)

We have, in a previous article, determined that there is a positive holiday effect in stocks. This effect happens on the days before the holiday. But is there an opposite effect? Is there a post-holiday seasonal effect in the stock market?

Yes, there are certain tradeable post-holiday seasonal effects in the stock market. We present you with one idea in this article that we later publish as monthly trading edge for our subscribers.

What is a holiday?

First, we need to define what a holiday is:

To simplify, we only look at trading days after three non-trading days. In practice, this means we look at days around the 1st of January, Martin Luther King Day, George Washington Day, Good Friday, Memorial Day, 4th of July (not every year), Labor Day, Thanksgiving, and Christmas (not every year).

We have backtested all these holiday effects, and you can find all the research in our special article about holiday effect in stocks.

How do we backtest the post-holiday seasonal effect?

We test the S&P 500 by using the ETF with ticker code SPY from inception in 1993 until today. We both buy and sell at the close of the same day as the signal.

We use Amibroker’s strategy optimization function and test by exiting after 1-5 trading days.

Post-holiday seasonal effect backtest no. 1:

In the first backtest, we buy the close before the holiday and sell on the close N bars later (max five days later):

Post-holiday seasonal effect

The first column shows when we exit the trade. The first row is one day and until the 5-day holding period. As you can see, holding over the holiday has produced no gains, while the second day after the holiday has made pretty good returns.

Let’s test and divide by months. The table below shows the different months (first column) and the performance by holding one day:

Post-holiday seasonal effect backtest

The table below shows the different months (first column) and the performance by holding two days:

Stock market performance after a holiday

Post-holiday seasonal effect backtest no. 2:

Let’s buy on the close of the first day after the holiday and hold for N bars:

Backtest after non-trading day

The first column shows which bar we sell on. As we saw in the first test, the second day after the holiday is best, with a profit factor of almost 2. The equity curve looks like this:

post holiday trading strategy

If we divide it into different months it looks like this:

post holiday trading strategy backtest

Options expiration week

Some holidays often end in an options expiration week, while others are after options expiration week. Hence, the performance during holidays might also be dependent on that.

Post-holiday seasonal trading strategy:

Is it possible to develop a tradeable trading strategy based on the post-holiday effect?

Yes, by adding one more variable we get this equity curve by holding from the close to the next day’s close (the holding period is one trading day, something we like to call an overnight trade):

Post-holiday seasonal trading strategy trading rules

There are just 100 trades over the period, but the average gain is 0.56%, the win ratio is 71% and the profit factor is 4. This is a seasonal trading strategy and trades on a certain date plus one other variable – two variables in total. The annual return is 3.5% while only being invested 1% of the time. Another key performance metric is risk-adjusted returns and this shows about 250%.

The trading edge will be presented as a monthly edge for our subscribers:

If you’d like to have the Amibroker code for how to code these specific days, you can order it here and at the same time get access to the code for practically all our 80+ free ideas and strategies we have presented among our free trading strategies (plus a lot of Tradestation code):

Post-holiday effect strategy – conclusions:

Short-term trading is mainly about finding inefficiencies in the markets. This article has provided some ideas on how you can profit from the holiday effect but by looking at the days after the holiday – let’s call it the post-holiday effect. The last strategy, which we didn’t reveal, doesn’t trade often, but this is precisely why you want to automate your strategy. Small edges add up.

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